Lending Club

In a world in which Google’s reorganizing itself to boost transparency into its main business, I thought it would be a good week to talk about transparency.

I’m a big fan of a transparency. A former boss, now chief operating officer of Morgan Stanley’s technology division, used to remind me that sunlight is the best antiseptic.

He used the term referring to dashboards on financials, projects and risk – but I’m using in a context of being transparent with your customers about your value and pricing.

In my experience, banks, are less transparent than startups. I think a reason is that banks have a lot of different constituents – and less of a singular value proposition – but startups and banks can fall short.

Consider Lending Club. A former employee told someone it saves the average borrower only 1.5% after factoring in all its fees.

It’s still decent savings, yet the company plays up the gap between savings account rates (<1%) and credit card rates, as if it were passing along savings of that magnitude.

(This issue isn’t limited to Lending Club. As reported by Bloomberg, a disclosure by Citi on securities from Prosper gave a forecast return of 5.48% on low risk loans; total losses were forecast at 8%; 13.2% average APR)

Lending Club and its peers are great models, but I think they could be more transparent. I’m optimistic about marketplace lending. But to help make it better, I encourage everyone to provide feedback to the U.S. Treasury’s RFI on this sector. Comments are due on Sept. 3rd.

I just read Morgan Stanley’s Smittipon Srethapramote set a target of $24 for Lending Club (60% above from its current price).

I’ve not spoken to Smittipon since the IPO, but read he was bullish given acquisition cost trends and growth ‘runway’: I was glad given my upbeat take on Lending Club in TheStreet.com.

Another topic I’ve been thinking about lately is this chart:

Created by the Financial Brand team, including FinTech Mafia member, Jim Marous, it was well worth sharing. It does speak to both how banks may have their heads in the sand, and also the marketing work that remains to be done at some startups.

As an advisor to startups, I’ve seen how difficult it is to break out into even the level of awareness of firms in the table, despite the increase in venture funding for FinTech.

I’d like to mention a startup, LoanNow, which is early stage and seeking to break out. I recently spoke with Miron Lulic, President of LoanNow, a ‘white hat’ (or responsible) online lender.

Similar to LendUp, key differences with LoanNow is it offers installment loans vs. revolving credit, and provides higher loan amounts. I admire Lulic’s goal to make lending better via technology, which he observed was pretty appalling in the payday lending industry.

LoanNow wants to bring better technology and an improved user experience (UX) to an antiquated, category of lenders that they also believe charges its borrowers too much.

We Help Good People Get Better Loans

LoanNow offers ‘gamification’ (e.g. challenges to meet in order to lower the APR), but one innovation unveiled at Finovate was ‘group signing’, or micro co-signing by your friends, to lower your interest rate (similar to Vouch).

LoanNow has the potential to succeed since it’s motivated to do the right thing for its clients, and is laser-focused on its target customers.

It’s a tough market for startups without backers from the biggest names, but I wish them well – and think they’ll be successful.

Several VC’s are staying clear of online lending (seeing it is ‘too hot’ as Emergence Capital told me, or in conflict with prior investments, as First Round Capital and CrossLink Capital indicated).

But it’s good to see Andreessen Horowitz is embracing FinTech with its recent appointment of Alex Rampell, former CEO of Trial Pay, as a new partner focus on opportunities in FinTech.

Still, some startups may have to bypass VC’s and emulate Patch of Land, that grew with the help of several accredited investors and a credit line, before gaining larger investors.

Embrace transparency

Here are my two closing suggestions for other early-stage firms in the online lending space.

Be true to audience and brand. If you’re targeting the lower end of the market, i.e. payday loans, don’t use a web design firm to make your site look like you’re Stripe (targeting developers) or LendingClub (targeting prime borrowers). Be yourself – don’t try to be like someone else.

Embrace transparency. Be very upfront about your value vs. other options that exist, i.e. don’t knock the banks as being ‘not lending’ since 2008 or ‘ignoring the SMB market’ when recent published figures don’t support this. Tell the truth, and you’ll win with customers.

What’s up with (or rather what’s driving down) Lending Club these days?

As someone who is optimistic about Lending Club’s prospects (as I had written in Jim Cramer’s TheStreet.com), I was surprised by the slump after its lock up.

My view is the stock suffers from fears of regulation, a reversal of halo effect on its stock from time of its IPO, and concerns about its numerous competitors.

Time will tell, but It’s striking that its Chief Risk Officer just sold $2m in shares at a price of around 50% off its high (and below its IPO price).

Looking at other players in the alternative lending space, there’s a lot of growth, with Patch of Land being one example.

I recently spoke with Patch of Land’s AdaPia d’Errico, CMO and early employee who joined co-founders Jason and Brian Fritton and Carlo Tabibi, to talk about the startups recent growth.

Patch of Land has seen huge growth serving “residential lending crowd funding enabled by the JOBS Act,” according to d’Errico.

By pre-funding its deals, a feature that started from its genesis as a business, she notes they combine a crowdfunding model with an ability to move quickly – a key requirement in real estate.

Patch of Land provides loans for those seeking credit for real estate purchases that often involve a plan to renovate, so it furthers the goal of founder, Jason Fritton, who envisioned restoring communities devastated by the real estate crash.

Fritton lobbied for rules to democratize capital formation for new business that were ultimately written into 2012 JOBS Act (Jumpstart Our Business Startups Act). I’ll explore Patch of Land more in 2015, when I discuss real estate crowd funding in more depth, but its recent progress speaks volumes about its and the broader FinTech industry’s potential.

Cumulative Loans Facilitated by Patch of Land

On a related note, it’s fascinating how despite the ink spilled over whether London, New York or Silicon Valley is “winning”, how many startups and investors are emerging in Los Angeles (e.g. Patch of Land, Realty Mogul, CoreVC).

In thinking more globally about the various segments of the industry, it’s useful to explore the the myriad visualizations out there trying to capture all the startup companies in this space.

I think there’s a clear role for easy-to-follow visualizations such such as CB Insight’s “Periodical Table of FinTech” (see at this link), but I recently generated a network diagram view of two hundred FinTech startups using Quid Explorer’s intelligence platform used by private company investors, media firms and consultants like McKinsey & BCG.

The visualization of the FinTech ecosystem uses implied relationships between companies from keyword analysis to generate clusters of similar companies within the broader category.

Payments companies like Stripe are the largest cluster in light blue (bottom right) and blur into the dark blue category (where you’ll find vendors like Zuora).

At the far right, in yellow, you see the bitcoin related companies.

Patch of Land is there at the very top, in the dark blue real estate cluster. Equity crowd funding businesses like Angellist and CircleUp are the purple cluster.

The tool didn’t put all online lenders in one category, with SMB lenders (such as Kabbage) in the red cluster, while consumer lenders, such as SoFi, shown in orange at bottom left. (In reality, many of these operate in both segments.)

The other green shaded clusters show capital markets focused startups like Xignite in dark green, while the light shaded cluster is where you’ll find startups like Betterment and MaxMyInterest, focused on savings and investments.

These charts show the challenges in defining the FinTech space – given its diversity. But I found it interesting to see the complex relationships within and across sub sectors of the broader category.

As some of you already know, I’ve recently joined a FinTech startup and could not be more excited about its prospects. Look for more on that topic to come, but for now – since I’ve been away for a couple of weeks – I just wanted to say welcome back.

Thanks for your readership – which is now up to over 10k readers per month. I also hope you have enjoyed recent posts on Goldman Sach’s FinTech strategy, LendUp and LOYAL3 (which generated a lot of interest).

As the online lending industry prepares for its big event, the LendIt USA conference in NYC on April 13-15, I thought it a good time to discuss peer-to-peer (P2P) lending.

To me, this aspect of FinTech is the perhaps the most interesting, innovative and straightforward versus other areas, such as payments (with all its participants – as noted in my last post), digital banking, cryptocurrency, and robo advisors.

P2P lending is disruptive and proven; it adds value in a clear way by providing better rates for borrowers, and higher rates for savers seeking to invest. Companies are tech-led, often with a distinctive ‘non-bank’ culture, people and work environment.

But at the same time, there are a few misconceptions I’d like to address – without detracting from the alternative lending industry’s innovation and success.

Most readers are familiar with P2P lending, given the press coverage lately. But for those who don’t know a lot about P2P, I’d suggest starting off by reading Peter Renton’s superb blog: LendAcademy.

Inspired by Peter Thiel’s question (from his book, Zero to One), “What important truth do very few people agree with you on?” here’s of few of my thoughts on P2P:

First, although this misunderstanding is more pervasive in the public than readers of this blog, ‘P2P lending’ is really not true P2P – and hasn’t been for some time. The fuel behind the industry’s growth has come largely from big institutional investors.

(The name marketplace captures the shift. For instance, at providers like Prosper, around 2/3rd of investors in its loans are institutions and 1/3rd are retail investors).

Beyond this, some in the press say that banks are “threatened” by marketplace lenders. A classic example of this was in the 2014 post “Why Wells Fargo Is Terrified of Peer to Peer Lending” published on Lending Memo, an affiliate link site (i.e. paid for clicks to alternative lenders). The truth is far more nuanced.

Just as institutions play an important role in the P2P model, big banks (especially the larger ones) benefit in myriad ways, e.g. wholesale banking groups are getting revenue from the related growth in ACH payments. Banks also profit by lending to the institutional investors that participate in the new platforms.

And CEO Renaud Laplanche has stated, Lending Club is expanding the market, not trying to take out the banks. Someone once said, having met Laplanche at a meeting at a bank: “He would fit in here easily.” (He’s famously low-key).

Having worked at Morgan Stanley, I know its people and franchise played a part (along with other banks, like Wells Fargo) in building Lending Club, from placing Mary Meeker and John Mack on the company’s Board, to helping plan as well as manage its IPO, to capturing the post-IPO wealth management opportunities. This is true at other big banks across other platforms.

And not just the big banks. Forward thinking banks, like Celtic Bank, behind Kabbage, also benefit from the growth in new lending marketplaces.

Another line often heard that I would disagree with is the marketing meme: “You know how bad banks are? Use X – we cut out the middleman.”

But many of the institutions are hedge funds or private equity firms. In fact, some funds just put up 15%, borrowing the rest from Citi, to leverage up their returns on marketplace sites from 8% to 12%. (This is fine by me, but let’s spare the David vs. Goliath myth about banks vs. startups since the story is more symbiotic).

And is the experience much better? Perhaps on pricing and speed. But some of customer experience (from Notes and using tools like Nickel Steamroller to having to master XIRR to see how you’re doing) isn’t a lot better, if you ask me.

What important truth do very few people agree with you on? – Peter Thiel

“Banks can’t innovate and are too slow” is another piece of conventional wisdom that I partially disagree with, though I agree to a point. To me, Schwab’s roll-out of the Intelligent Portfolio’s is a proof that incumbents can be fast followers.

But I agree that the nimble size of startups, focus on customer needs, role of VC’s and lack of legacy technology can lead to more innovation. And the startups can lead to others having to up their game, e.g. Prosper’s superior credit model will lead others to improve their model, for example.

I could still envision banks, either as a consortrium or supporting a startup backed by the VC’s active today in FinTech, e.g. Canaan Partners, CoreVC, Foundation Capital, A16Z, General Catalyst Partners and Google Ventures – starting a broker-dealer to create a cross-company secondary market in notes from Prosper, LendingClub and others.

I’m sure there will be plenty of other interesting conversations about SoFi’s valuation, and whether Lending Club’s post IPO performance suggests anything other than too high expectations (plus effect of the looming June lock up) at LendIt.

It’s a pivotal time for marketplace lending, as recent articles in the FT and on some industry blogs have noted. It’s clearly in the early innings, but I expect lots more great things to come from marketplace lending.

But to close, having sailed for LBS vs INSEAD in a race around the Isle of Wight, I’d like to just give a shout out for Lending Club’s record time across the English Channel last week (see photo at top).

Impressive achievement and useful reminder there’s a world of adventure out there – beyond the stock market and marketplace lending!

Last week, the biggest news in FinTech was Lending Club (NASDAQ: LC) went public in an IPO that was significant for 3 reasons:

First, it’s now one of the best-known public names in FinTech, and more specifically is new proof point that traditional financial services, such as credit, can be disrupted by a technology-focused startup.

Second, the size of the offering and the amount raised – which was over $1B, since the underwriters exercised their full option for 8.7 million shares – put it among the largest US technology IPO’s in recent memory. This is significant since the scale both generated headlines and calls attention to category.

Third, the business model: peer-to-peer (P2) or marketplace lending, is a key category for a range of players in FinTech, such as Prosper, OnDeck and SoFi.

The business model has been explained sufficiently elsewhere, but the essence is that the Internet enables customers to borrow more cheaply than they might have using traditional sources. On the other side of the balance sheet, lenders (‘investors’) can receive a higher return for a fairly transparent amount of risk than they would otherwise. A win-win.

And what growth….

Source: Company Filing

On a personal note, as a San Francisco area resident, I was also glad to see the success of Lending Club as a validation of this new emerging category of business to be based here.

Its HQ is right in heart of South of Market (SoMa) alongside Twitter, New Relic, Google, GitHub, DropBox, Quid and Hired.com

Note: Lending Club was once based in Sunnyvale and Redwood City, moving to SF in 2011, so also constitutes an example of recent migration from Silicon Valley to SF.

As a former Morgan Stanley executive, Cynthia Gaylor, who worked at the office I did at Sand Hill Road in Menlo Park, tweeted in 2013 when she left the bank to head up Twitter’s corporate development team, “Let the migration north begin!”

While one could certainly argue – and analyst coverage would definitely support this view – that Lending Club is a financial services company, to me the company is also very much a tech company for 3 reasons: origins, culture and vision.

First, remember… this was literally one of the first apps you could use on Facebook! Further, the founders were not bankers, but rather included CEO Renaud Laplanche as a former the entrepreneur who had a successful exit, and then worked at Oracle).

The culture is also typical of that at most technology companies, in terms of what’s seen as positive about working in tech, i.e. open and collaborative culture, non-hierarchial, focus on engineering, importance of product, and “quirkiness” (e.g. offices to encourage a sense of play and collaboration).

In terms of culture, Glassdoor gives Lending Club gets a 4.6 / 5 star rating. Just compare that to traditional banks like Morgan Stanley, where it’s about 3.5: Lending Club gets ratings more like a well-run tech company or startup.

More importantly, the vision. As John Battelle said this fall at NewCo Silicon Valley’s kick off event at Survey Monkey’s HQ, the latest crop of tech firms based are looking more than just to make money – they want to change the world, or at least improve something that is broken. Lending Club definitely has that vision.

In fact, it was born of the founder’s frustration that typical credit card rates were 18%, which seemed altogether too high to him, so he envisioned a way to match borrowers and lenders directly. There’s obviously much more to it, but the best business idea also has a simple “story” to it, and clearly this is true for Lending Club.

This blog does not provide investment advice, so I’m not going to provide a view of their valuation, but I applaud their success. CEO Renaud Laplanche is not someone I know, but connected with when I when I moved to San Francisco, as a fellow graduate of London Business School.

It’s good to see a fellow graduate succeed, especially when these days an MBA carries less weight than being a full stack engineer. The world needs both!

From my experience in launching new products at established banks and startups, Lending Club provides a compelling example of how to embrace the value of technology in a really smart way, and deliver value to several market participants.

And the timing couldn’t be better. The IPO market is back on track in 2014, with recent successful IPO of Alibaba earlier this fall. Just today, another, albeit smaller marketplace lender, OnDeck focused on small business lending, went public.

Well done, Lending Club – here’s hoping many other FinTech firms will find similar success, rewarding entrepreneurship and risk-taking, and hopefully providing a push towards innovation among the larger financial services companies, as well as a shift in the corporate cultures of banks – both here in the US and around the world – towards a more inclusive, collaborative culture.

Not all banks will fully embrace user-centric design or Scrum, but I hope some do, along with view that making things better is more than just delivering a slightly better loan or APY…

“We want to transform the banking system into a marketplace that is more competitive, more consumer-friendly, more transparent.” CEO Renaud Laplanche

Welcome news, and a model to emulate….. it takes more than just ping pong tables and pet-friendly environment!